See How Much You Qualify For
When you're in the process of acquiring business capital, it's important to know the differences between major funding types. A merchant cash advance (MCA) and a working capital loan may seem similar in many respects but there are important differences that you should be aware of.
What is a Merchant Cash Advance?
A merchant cash advance is a cash advance that's repaid in daily, variable amounts, as a percentage of each debit card or credit card transaction until the agreed-upon amount and fees are repaid. Businesses who are approved for an MCA receive a lump sum from the lender and pay the loan back through a percentage of their sales.
Advantages of a Merchant Cash Advance
Business owners may be drawn to a merchant cash advance because of the relative flexibility when compared to large, traditional bank loans. Cash advance institutions aren't typically concerned with a borrower's creditworthiness; instead, they typically look to payday loans Lebanon Ohio see that you have consistent daily sales rolling in.
As long as you can provide point-of-sale or bank data showing what your cash flow looks like, you're likely to be approved for a merchant cash advance.
Disadvantages of a Merchant Cash Advance
While a merchant cash advance may be a great fit for some business owners, there are several drawbacks to this type of loan to be aware of.
1. MCA's Aren't Legally Considered Business Loans
A large disadvantage of merchant cash advances is that this type of capital is not technically a loan. Rather, it's legally considered a sale of a percentage of the business owner's future sales.
This classification means that businesses who acquire funding through an MCA aren't held to the same standards as financing institutions who legally call their product a loan, nor are they held to state usury laws. By taking advantage of this kind of financing, you could put yourself at risk for predatory lending practices, damaging your business' finances.
2. Your Approved Amount Could be Limited
The amount of a merchant cash advance is predicated largely upon your credit and debit card transactions. If your business conducts many transactions via wire transfer, ACH, or cash, this ount of capital you're eligible to borrow.
For example, if your total revenue is $1M but only $400k is comprised of card transactions, this could limit the funding amount available to you.
3. Payment Terms Are Difficult to Predict
Merchant cash advance loans are repaid as a percentage of your daily sales, which can fluctuate largely from day to day. This makes it difficult to know for sure when your loan will be repaid in full, which may make it hard to plan for future financial contingencies.
Additionally, many merchant cash lenders require that you switch to their approved credit card processor, which can put a hiccup in your own operations and cause delays when it comes to accessing your own cash flow.
What is a Working Capital Loan?
A working capital loan increases your operating liquidity and cash flow, providing you with the capital you need to maintain daily operations. Once approved, you receive a lump-sum loan, and the funds can be used for any business purpose – you can use this capital to reinvent your ent, take advantage of an expansion opportunity, or simply get ahead financially 1 .
Like merchant cash advances, working capital loans can be repaid in small, daily, manageable repayments. But unlike merchant cash advances, working capital loans are legally loans, which mean that you have the benefit of state usury law on your side, and you're better protected against predatory practices.